To track the intended -- and more importantly, unintended -- consequences of policies,market movements,buyout deals and regulatory censure. This forum will map the multiplier effect of what may seem minor events initially but spread out far and wide.

10/15/2010

Currency war escalates as 18 nations intervene to keep their money cheap

I had earlier blogged about a brewing currency war (see here) but recently I unearthed some data that I found intriguing. The war of cheapening their country’s currency to bag a larger share of exports, has not only escalated, it has widened and is pulling in many more actors than we knew of.

18 to be precise, says the Dutch NIBC Bank N.V. in its October 11 report. In my last post, I was piecing together anecdotal evidence and statements from the Brazilian finance minister to conclude that an increasingly interventionist mindset was influencing the governments in minding their currencies. This report, however, documents that at least 18 countries – and NIBC says it could have missed a few – “have intervened in FX markets over the last few weeks, including Japan, South Korea, Indonesia, Russia, Singapore, Columbia, Thailand and Brazil.”

That China is not relenting on yuan is old news. The newer part is that Japan and South Korea are now quibbling over latter keeping the ‘won’ low and eroding Japanese competitiveness. Moreover, countries such as the US and UK which have not directly intervened in currency markets so far, are also planning to undertake further quantitative easing. This increase in money supply will have the same impact of depreciating their currencies.

It will be interesting to see how this dynamic unfolds and spreads; how each one of these countries balance their national interests as they play a new age version of this ‘beggar thy neighbour’ game. The obvious losers? Countries in the European Union such as Greece and Italy! They are stuck with deficits, saddled with the euro that leaves no flexibility in managing their currency. No longer able to depreciate their currency to boost their exports, these nations but can only see others grab a larger slice of the global exports pie.